Life assurers welcome 50-year bond plan

The plan from the chancellor, to issue bonds with very long maturities to help to solve Britain's looming pensions crisis was welcomed by life assurers yesterday.

The Debt Management Office is seeking responses from the City about the appetite for a variety of different debt instruments with maturities of up to 50 years. Feedback from informal consultation with pension providers suggests supply of long-dated bonds "falls short of demand", said the DMO.

Geraldine Davies, of Prudential, said: "The possible issue of bonds with a 50-year maturity is extremely good news. We need to find investment vehicles that will give certainty to our customers." Longer dated bonds should give better annuity rates, and would help to encourage people to save, she added.

As life expectancy increases and the population ages, life assurers have complained that it is increasingly difficult to match their liabilities with existing debt instruments.

The pensions industry is the largest investor in gilts. According to the Office for National Statistics, 64% of all gilts are held by the domestic pension industry with an even higher proportion of index-linked and long maturity bonds.

The government wants to discuss a range of possible debt instruments with the City including a longevity bond. Such an instrument has its return linked to the overall population's life expectancy.

Earlier this week, the governor of the Bank of England, Mervyn King, called for the Treasury to issue longevity bonds. At the moment, a life assurer can face a shortfall in funds if their clients live longer than expected. Mr King said longevity bonds would help life assurers to hedge this risk.

Ms Davies said: "We don't yet know which type of instrument we will want to adopt but we welcome the opportunity to work through them with the DMO."

If a government bond with a 50-year maturity was issued, Britain would be the first country to introduce such an investment vehicle. The majority of bonds issued have 10-year maturities but the number of 30-year bonds is also increasing.

Any new bonds to be adopted by the government would be announced next spring with the DMO's remit for 2005-2006.